The Name of the Game is Profit Optimization
And the Fundamentals Required to Align Sales and Credit
In larger organizations, those with credit professionals on staff, the credit function is sometimes disparaged as the “Stop Sales” department. When that’s the case, it’s clear that sales and credit are not properly aligned and the resulting friction is bad for business.
The purpose of having a credit function is to ensure a profitable sale. There’s no profit when a customer is granted credit terms if ultimately they are unable to pay. Banks don’t survive if they make bad loans. Likewise, businesses selling on open credit terms need to protect their cash flow.
It’s also problematic if a sale and the associated profits are lost due to an overly restrictive credit decision. Faced with a customer with less than stellar credit, the job of the person charged with approving credit is to find terms that allow the sale to go through while also ensuring payment will be secured. There are numerous risk management techniques that can be used to mitigate credit risk, but that’s fodder for another post.
In smaller organizations, one of the Principals, or possibly the CFO or Controller, is typically the person making credit decisions. Even though credit personnel are not making the decision, there still needs to be alignment reconciling company objectives and the framework for credit approvals and denials.
Lacking this understanding, sales efforts may be misdirected, which is a waste of valuable resources and time. When sales and credit decision-making are aligned with company profit objectives, everybody’s energy is channeled toward the same goal.
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CASE STUDY: Sales & Credit Working Together to Increase Profit
Even though you establish a credit policy and everybody buys into it, there will still be circumstances where there is a valuable sales opportunity with a potential customer that is not very credit worthy. Most companies handle these on a one-off basis and make a business decision that overrides a policy-based credit decision. These are questions of exposure verses opportunity.
Because of the frequency of this type of situation, a metal goods manufacturer decided to set-up a protocol that would limit their exposure in the aggregate. Very simply, they set up a group credit limit for these types of sales. When one of these situations arose, the sale would be approved on open terms as long as the sale did not put the group exposure over the group credit limit. With each payment from one of these risky customers, additional credit availability was freed up for future risky sales.
Over the course of a year, this program proved to be very successful. While substantially higher bad debt losses were realized compared to the rest of the receivables portfolio, the company still made a profit while increasing sales 10 percent and using up excess manufacturing capacity.
Read on to learn:
The Four Factors that Determine Credit Policy
How a Customer Focus Better Aligns Sales and Credit
How to Profit from Customers Lacking Liquidity
Another Profit Focused Strategy for Managing Risk
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